Canadian companies are retrenching as the global economy darkens, forcing
Bank of Canada Governor Mark Carney to step up his efforts to block their
retreat.

Mr. Carney paired the release of a dispiriting business outlook survey with a
speech that sought to convince executives that the economic backdrop isn’t as
bad as many seem to think. His message: Tepid growth is still growth, and
caution need not become paralysis.

Economy

“We must take care not to allow uncertainty to dominate our actions, letting
profitable opportunities slip away and, more generally, compounding the very
real, but still manageable, challenges facing the global economy,” Mr. Carney
said in a speech in Nanaimo,
B.C.

Earlier in Ottawa, the Bank of Canada released its latest quarterly survey of
business intentions, which showed that executives’ enthusiasm for investment has
diminished to its weakest since the end of 2009. , when the financial crisis was still having an
effect.

The third-quarter Business Outlook Survey reported that only 37 per cent of
respondents intended to boost investment plans over the next 12 months, compared
with 43 per cent in July. The proportion planning to spend less on new
machines, computers and buildings and the like increased to 29 per cent from 19 per cent
three months ago.

“Many (mostly large) firms reported having recently completed
significant projects and noted that, in the current environment, the emphasis
would shift toward more intensive use of existing capital, through projects
related to improving logistics and supply-chain process,” the central bank said
in the report.

Weaker business spending heralds lacklustre economic growth for
Canada over the next year, because households and governments are expected to
cut spending to ease heavy debt loads.

Mr. Carney and Finance Minister Jim Flaherty have exhorted Canadian businesses to
boost spending rather than hoard record levels of cash.

Mr. Carney told reporters that the contribution of housing to
Canada’s gross domestic product – through heightening construction and the
wealth effect of soaring home prices – has exceeded its historic average for
several years and would soon revert to the norm. “We need other engines of
growth, investment particularly,” he said.

Companies, however, are worried about the future. The Bank of
Canada survey shows that 57 per cent of respondents said sales were stagnant or
declined over the previous 12 months, compared with 47 per cent in
July.

Few expect that to change: As many companies – 35 per cent of
respondents – predict sales will decline over the next year as predict revenue
will increase. A third predict no change.

The International Monetary Fund last week at its annual meetings
in Tokyo cut its outlook for global economic growth this year to 3.3 per cent –
the slowest since the 2009 recession – from 3.5 per cent in July, and said the
risks of an even faster slowdown were “alarmingly high.”

Headwinds include Europe’s debt crisis, which has triggered a
recession, worries over whether U.S. politicians will sort out a combination of
tax increases and spending cuts equal to 4 per cent of gross domestic product,
and slower economic growth in China. The IMF predicts only a modest increase in
economic growth of 3.6 per cent in 2013.

Mr. Carney was on his way back from the IMF gathering. He agreed
that there are plenty of reasons to feel uneasy about the global economy, but he
insisted on perspective.

While there is plenty of disagreement over the efficacy of the
Federal Reserve’s latest bond-buying program, Mr. Carney said the latest round
of monetary stimulus in the United States would be “modestly positive” for
Canada by stoking U.S. demand and increasing commodity prices.

He said he expects U.S. politicians will avoid the “fiscal
cliff,” a combination of 2013 tax increases and spending cuts that’s so large it
likely would trigger a recession. And Mr. Carney pointed out that the slower
growth predicted for China this year still would add $800-billion to global
GDP.

Still, Mr. Carney said policy could do more to instill confidence
by explaining clearly their plans. In that spirit, Mr. Carney said for the first
time that if the Bank of Canada were to opt to deflate Canada’s household debt
bubble by raising interest rates, he would “clearly declare” what he was
doing.

“If we were to lean against emerging imbalances in household
debt, we would clearly declare we are doing so and indicate how long we expect
it would take for inflation to return to the 2 per cent target,” he
said.

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